Tata-Docomo row: Government may introduce a new price band for cross-border equity contracts

The policy will be applicable to future transactions, in instances such as the Tata-Docomo agreement that was reached when such instruments were not valid.Deepshikha Sikarwar | ET Bureau | Updated: August 25, 2016, 09:13 IST

NEW DELHI:India is considering the introduction of a price band instead of the currently mandated ‘fair price’ for transfer of equity instruments with inbuilt options. The aim is to make India a more attractive foreign investment destination by offering flexibility in price fixing besides preventing the kind of dispute that has broken out between the Tata group and NTT Docomo.

The proposal would liberalise the framework for such instruments that are popular in crossborder deals, said a senior government official. “There would be provision for a price band for conversion in quasi-equity instruments,” he said, adding the Centre wants to ensure greater ease of doing business.

The revamped policy as it stands, which is to be taken up by the Cabinet soon, seeks to allow exits within a price band that would give some flexibility for conversion of instruments with optionality clause.

The price band could straddle the fair price. While the policy will be applicable to future transactions, in instances such as the Tata-Docomo agreement that was reached when such instruments were not valid, the relevant adjudicating authority can rely on the new rules if it deems fit, said the person cited above.Foreign investments with call and put options were allowed for listed entities in 2013 and unlisted ones in 2014 with a one-year lock-in.

The buyback of securities under the optionality clause, however, had to be at the prevailing price or fair market value determined at the time the option was exercised.

This was to prevent exits at an assured return, which would have given such investment the character of debt and for which different rules apply.

Before 2013, the regulations under the Foreign Exchange Management Act did not allow call and put options for foreign direct investment (FDI) as the Reserve Bank of India regarded it as debt in the guise of equity.

A call option allows the holder to buy shares in an entity at an agreed price while a put option allows an investor to sell at a predetermined price.

Put options, which give special rights to foreign investors to sell back equity if certain performance conditions such as timely listing are not fulfilled by the Indian company, were largely seen as facilitating inflow of overseas debt that would go out of the country after some time.

TATA-DOCOMO TANGLETata Teleservices got Foreign Investment Promotion Board approval on January 9, 2009, to receive investment from NTT Docomo subject to conditions that it would be in compliance with RBI pricing guidelines and applicable Indian laws.

Tata Sons, Tata Teleservices and Docomo signed a shareholder agreement on March 25, 2009, stipulating that if key performance indicators weren’t achieved, the Japanese investor would have the right to issue a sale notice and sell the shares at fair value or at 50% of the subscription price, whichever was higher.

Also, if Tata Sons was unable to find a buyer, it would be obliged to buy back the shares at fair value or 50% of the subscription price, whichever was higher.

Docomo invoked this clause after Tata Teleservices failed to meet targets by March 31, 2014. The fair valuation at that time was Rs 23.34 per share while 50% of the subscription price of Rs116.09 was Rs 58.045.

This was tantamount to a guaranteed return even though the investment was in equity, which is risk capital subject to both upside and downside risks and not in line with extant policy.

The Tata group wrote to RBI seeking an exemption. After consulting the government, the central bank said no exemption could be made.

The central bank subsequently asked the finance ministry to implement the proposed policy for hybrid instruments retrospectively to cover the Tata-Docomo transaction.

But since FDI policy is usually never implemented retrospectively, it refused since this would have meant making an exception for a single investor.

An international arbitration court has ordered Tata Sons to pay $1.17 billion (nearly Rs7,956 crore) to NTT Docomo for breach of contract on the grounds that the Indian group neither found a buyer nor bought back the Japanese partner’s 26% stake in their telecom joint venture.

The Tata group has deposited the amount in the Delhi High Court pending a resolution of the dispute.